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Saving: The Magic of Compound Interest

Provided by the International Finance Corporation


Compound interest arises when interest is added to the principal, so that from that moment on, the interest that has been added also itself earns interest.  In short, you make money from your money.  Compounding of interest allows a principal amount to grow at a faster rate than simple interest, which is calculated as a percentage of only the principal amount.  In fact, Albert Einstein once was purported to have stated,“The most powerful force in the universe is compound interest.”  The below three examples will illustrated the power of compound interest.

Example #1

By instilling the saving habit early in life, even the goal of becoming a millionaire by the age of sixty-five can be reached. By starting at the age of twenty and saving QR95 per month, you can end up with a million Qatari Riyal by the age of sixty-five, assuming a 10 percent return on the money (tax deferred). This is also assuming that none of the money will be withdrawn during the waiting period.

This goal also can be reached if you wait until you are older to start saving, but the amount you must contribute monthly increases dramatically the longer you wait. For example, if you wait until you are thirty years old, you will need to save QR263 a month. If you wait until you are forty years old, you will need to save QR754 a month, and if you wait until you are fifty years old, you will need to save QR2,413 a month.  The below chart also shows how you can reach the QR1 million goal by age 65 if you prefer to make a one-time investment, monthly investment or annual investment at various ages.

Age

One-time Investment

Monthly Investment

Annual Investment

20

QR13,719

QR95

QR1,391

25

QR22,095

QR158

QR2,259

30

QR35,584

QR263

QR3,690

35

QR57,309

QR442

QR6,079

40

QR92,296

QR754

QR10,168

45

QR148,644

QR1,317

QR17,460

50

QR239,392

QR2,413

QR31,474

55

QR385,543

QR4,882

QR62,745

60

QR620,921

QR12,914

QR163,797

Example #2

This table illustrates the value over time of QR1,000 invested annually (only QR84 a month):

Interest Earned

5 Years

10 Years

15 Years

20 Years

5%

QR5,526

QR12,578

QR21,579

QR33,066

6%

QR5,637

QR13,181

QR23,276

QR36,786

7%

QR5,751

QR13,816

QR25,129

QR40,995

8%

QR5,867

QR14,487

QR27,152

QR45,762

9%

QR5,985

QR15,193

QR29,361

QR51,160

10%

QR6,105

QR15,937

QR31,772

QR57,275

11%

QR6,228

QR16,722

QR34,405

QR64,203

12%

QR6,353

QR17,549

QR37,280

QR72,052

Example #3

Investing QR10,000 in a one-time lump sum also pays off:

Interest Earned

5 Years

10 Years

15 Years

20 Years

5%

QR12,763

QR16,289

QR20,789

QR26,533

6%

QR13,382

QR17,908

QR23,966

QR32,071

7%

QR14,026

QR19,672

QR27,590

QR38,697

8%

QR14,693

QR21,589

QR31,722

QR46,610

9%

QR15,386

QR23,674

QR36,425

QR56,044

10%

QR16,105

QR25,937

QR41,772

QR67,275

11%

QR16,851

QR28,394

QR47,772

QR80,623

12%

QR17,623

QR31,058

QR54,736

QR96,463

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